Property pros: Savvy firm uncovers value in unexpected places

Specializing in distressed properties, Tampa-based EquiAlt established a unique niche. Can it withstand a downturn?

In just eight years, EquiAlt, a privately held, Tampa-based property investment and management firm, has amassed more than $150 million in assets.

What's its secret?

For starters, using borrowed funds and money from just a handful of investors, founder Brian Davison scoured the tax deed auction market, first in Las Vegas and then in Florida, for distressed single-family homes he believed could be turned into solid, income-generating properties via a combination of title work, physical repairs and better management.

Executive Summary

Executive. Brian Davison

Industry. Real estate investment

Key. Diversified approach yields big growth for young firm

Exploiting the bottomed-out residential real estate market could last only for so long, however, so Davison, 47, has since had to adjust on the fly. He's turned to multifamily and small commercial properties, even hotels, to keep up the growth. His ability to read the market has helped EquiAlt expand from 12 to nearly 300 properties in Florida, Colorado, Oregon, Washington, Tennessee, North Carolina and New Jersey.

The company’s success speaks to the need for business leaders — even at the highest levels — to stay keenly abreast of the fundamentals that underlie their industries and be able to anticipate change.

“I think the last time we participated in a tax deed auction was January 2016,” Davison says. “We had to make a fundamental shift after that because the real estate market had fully healed by that point, and investors’ psyches had changed … [they] felt much more comfortable running down to the courthouse and paying cash for a property with no title insurance.”

“If there is a dislocation in the marketplace, if fear somehow runs through the marketplace, that would be good for us.” Brian Davison, founder and CEO of EquiAlt

EquiAlt has continued to diversify by starting a Real Estate Investment Trust, as well as a Qualified Opportunity Zone fund. The latter, made possible by recent changes to the U.S. tax code, allow real estate investors to defer capital gains taxes. They can then take profit from the sale of an asset and invest it in properties and developments in one or more of the thousands of Opportunity Zones the federal government has designated nationwide.

(A local example of a Qualified Opportunity Zone project is the industrial area in Ybor City, where the Tampa Bay Rays had hoped to build a new stadium. QOZ fund investments had been touted as a potential funding source for the project, before the deal collapsed in late December.)

Davison also discovered a nice nugget on Qualified Opportunity Zones: More than half of EquiAlt’s property portfolio is located in Opportunity Zones across the country. He believes that makes the company particularly well suited to get a decent slice of what could be an $80 billion opportunity.

“There are a lot of people running around opening up QOZ funds … they'd like to participate in that space,” he says. “But the truth is they have no experience participating in economically distressed areas, and we do. I think that makes us, potentially, better managers of those assets because we have experience buying, fixing and maintaining those [types of properties].”

DISTRESS SIGNALS

Distressed properties — where EquiAlt makes its bones — aren’t necessarily ramshackle houses in need of rehab, Davison says. The term can apply to properties that have title problems or suffer from mismanagement that prevents them from meeting their investment potential.

Piece of history

Piece of history

Tony Kelly, EquiAlt’s chief investment officer, came aboard in 2012, not long after Brian Davison founded the company, and when he’s not analyzing investment opportunities all over the country, he’s managing the rehab of a unique local asset — the oldest house in Tampa.

EquiAlt, a Tampa-based property investment and management firm, made a splashy investment in2017 when it spent nearly $500,000 to buy the 2,200-square-foot home and move it five miles, from the eastern edge of Ybor City to a vacant lot, owned by EquiAlt, in South Tampa. The lot is at the corner of South Westland Avenue and West Cleveland Street.

However, because of the less-than-desired area the house had been in, it was occupied at the time — but not by a legitimate owner or renter.

“We made a deal with the resident to watch the house for us until we could get it moved,” Kelly says. “There was an old Victorian house across the street that got burned down by vandals, so we were afraid of that happening. Once word got out that we planned to have it moved, we got some calls warning us about potential damage if we didn’t have someone watching it.”

Though the house cost only about $50,000, EquiAlt spent $225,000 to move it. The vacant lot cost about $220,000. Davison doesn’t think he overpaid, however, saying when fully restored, the home’s value will be similar to that of the other small commercial properties on the block. “The goal right now is to make it a small commercial space, just like everything else on the street. It will fit in with the community very well.”

There’s a lot of work to be done before that happens, says Kelly. “We are doing a plan development revision,” he says. “It will allow us to switch the rear of the house back to the way it looked in 1892.”

Davison has hired additional employees to assist Kelly with the restoration process. He acknowledges the project is a lavish investment for a company mindful of being pragmatic, but believes it’s a unique opportunity to do something special.

“The oldest house in Tampa was sitting over there in east Ybor and it was unprotected, and because of its geographic location, there was no chance of it ever being protected, because you have to have at least 10 historic properties on a street, and that street did not have that,” he says. “It pulled at my heartstrings.”

“We’re always looking at properties where we can create value — they are always distressed at some level,” Davison explains. “You can have a beautiful piece of property on the water, but if the title is completely messed up, nobody can insure or loan against it, so there's nothing to do with it. We’ll clean up the title on a property and make it a viable asset to the community.”

Where EquiAlt sets itself apart, Davison says, is with another type of distressed property — the mismanaged kind. “In some cases it’s a perfectly good property, but it’s not managed efficiently and professionally," he says, "so you have tenants who aren’t paying on time and not respecting the property.”

EquiAlt makes significant improvements on the properties, including having its own managers. “Then it will produce a better yield and contribute more to the community around it,” says Davison, adding that the firm’s approach breaks from standard industry practice, which is to outsource management functions. “Many other REITs, they’re not bothering to be asset managers, because it’s a tedious process, a low-revenue process. It’s a cheap bill for them to pay out — have somebody else do it.”

UPS AND DOWNS

Ron Stevenson, a financial adviser with Prescott, Ariz.-based American Financial Security LLC, has been doing business with EquiAlt since the beginning. Not only does he invest clients' money with EquiAlt, but he also invests his own.

EquiAlt, he says, "has no debt on their investment properties. That's very attractive to us and very unique in the business. A lot of companies are trying to do things similar [to EquiAlt], but most of them have a lot of financing and leverage on their properties."

The company's willingness to jump into new financial products like QOZ funds is another selling point. "They're following the current trends," Stevenson says. "These guys immediately seized on the Opportunity Zones, which can be tremendous for long-term acquisition of a property because if you hold it for at least 10 years, then it has a very favorable tax treatment on the back end."

EquiAlt bought and moved the oldest house in Tampa about five miles from Ybor City to South Tampa. Courtesy photo.

Meanwhile, as someone intimately acquainted with the real estate crash and subsequent economic downtown a decade ago, and before that the bursting of the dotcom bubble followed by war in Afghanistan and Iraq, Davison is well aware of the crests and troughs of the market — and how to navigate them. That's why Davison says properties in EquiAlt’s REIT are debt-free, positioning the fund to cope with a slowdown in lending and investment when the current cycle of economic expansion winds down.

Because of that outlook, and thanks to the diversified nature of its portfolio, EquiAlt has seen an influx of institutional investors come aboard — another strategic success Davison chalks up to the company’s REIT and QOZ funds.

“For guys like me who are part of Generation X, I can almost predict that every four to eight years there’s going to be some sort of disaster," he says, "so we’ve really built our products with that in mind.”